ATRA Tax Increase or Tax Cut?

January 3, 2013

The American Taxpayer Relief Act of 2012 (“ATRA”) is being described by many (including both Republicans and Democrats) as a tax increase of more than $600 billion. At the same time, from a different perspective, it’s a tax cut — and one of the largest in history.

It all depends on whether you compare the effect of the law with existing law or existing policy. As of 2012, existing policy was to tax individuals at rates no higher than 35% and most long-term capital gains at rates no higher than 15%. Relative to that situation, ATRA imposes a significant tax increase on high-income individuals.

Yet the law in effect prior to ATRA called for the Bush tax cuts to expire. In addition, the alternative minimum tax (“AMT”) was set to expand its reach to tens of millions of additional taxpayers. In cancelling or ameliorating those scheduled increases, ATRA reduced future tax revenues, relative to the amounts that would have been collected according to the laws then in effect, by nearly $4 trillion.

Normally politicians are eager to brag about cutting taxes. It’s curious that neither Republicans nor Democrats see any advantage in pointing out that they just enacted a $4 trillion tax cut.